1. Presentation to the WTO Seminar on Exchange Rates and Trade The influence of global liquidity on the South African Rand and the currencys negative effect on the manufacturing sector 27 th March 2012 By: Stewart Jennings – PG Group CEO and South African Manufacturing Circle Chairman

2. A snapshot of the SA economy NOTE: The views expressed in this presentation are those of the SA Manufacturing Circle and not the SA Government The economy has experienced pedestrian growth during the largest resource boom in the history of mankind (2002 – 2008). Projected economic growth levels for the immediate future are amongst the lowest in Africa (2012 forecast at 2.7%). The SA Rand (ZAR) is one, if not the most volatile currency in the world. South Africa operates a free float exchange rate and an open capital account. South Africa has a very efficient and well regulated banking system that weathered the 2008/2009 financial crisis extremely well. South Africa has a very efficient stock market (JSE). Customs duty levels are extremely low, and were reduced considerably in the late 1990s as SA opened its economy after the fall of the apartheid government. South Africa is still very much a developing country, with significant challenges in poverty, shortage of skilled labour, education deficiencies and in particular unemployment – with levels reaching between 23% - 34% depending on the definition of unemployment. South Africa adopted very much a developed country economic model and sacrificed growth for inflation targeting. All the above conspired towards an underperforming growth rate, in which the financial and retail sectors have grown disproportionately to the manufacturing and agri sectors. Imports from developing countries with significant government incentives have taken advantage of the factors detailed above.

3. GDP growth % (average 2011 – 2012) SA 2011 – 3.1% Forecast 2012 – 2.7% Source: IMF, RMB FICC Research

4. Top ten fastest growing economies 2011-16: Non-OECD countries to sustain global growth Source: IMF, RMB FICC Research

5. SA GDP growth (government estimate) Source: Stanlib

6. Real GDP Growth (%): Supply Side - Mining, Agriculture, Manufacturing and Electricity, Gas & Water production shrink in 2011 3 rd Quarter Source: Stats SA

7. Trade Balance - Balance of trade Source: SARS

8. Prices & interest rates - food, energy and electricity prices putting pressure on inflation outlook Jan-2012 Core Inflation: 3.9% Jan-2012 Headline Inflation : 6.1% Source: SARB & Stats SA

9. Prospects on other key macro variables Constant 2005 prices 200920102011e2012f2013f GDP% change-1.72.82.53.03.3 Fixed investment% change-2.2-3.75.65.86.9 Household Consumption% change-2.04.42.93.43.6 Government Consumption% change4.84.64.5 Exports (goods & services)% change-19.54.71.91.72.1 Imports (goods & services)% change-17.49.66.55.96.7 Current Account Balance% of GDP-3.9-5.2-6.5-7.6-8.8 Consumer InflationPeriod average7.14.35.87.16.7 Producer InflationPeriod average0.06.09.010.37.4 Exchange Rate R/$Period average8.677.47.006.866.55 Unemployment Rate% of labour force23.924.924.724.123.5 Source: PAIRS

10. Unemployment - The unemployment rate remains high Source: Stats SA

11. Youth and adult employment ratios in SA and selected emerging market economies Source: ILO (Key indicators of the labour market, 6 th Ed. ), Statistics SA quarterly labour force survey, June 2010

12. Employment decoupled from economic growth Has deindustrialisation and the currency played a role? Labour Relations Act (1995) Employment vs. Economic Activity Source: ADCORP

13. Free market response #1: SAs contract labour force vs. permanent employment Permanent employment Atypical employment

14. Unemployment remains the major challenge facing SA Unfortunately unemployment has increased over the last 18 years, with deindustrialisation being a major factor – 13% unemployment in 1994 to 37% currently Official labour force size: 17.4 million of which 13 million formally employed 4.4 million South Africans are currently unemployed 2.0 million permanently discouraged about their prospects of finding work 2.1 million people underemployed ( Stats SA ) 2.7 million (61%) of those officially unemployed have been out of work for more than a year Nearly half (46%) of the economically active population is idle, with a staggering proportion (74%) of these under the age of 24 By any measure, unemployment is easily South Africas most pressing socioeconomic problem Who are the unemployed? Youth, black African, never worked before The current exchange rate environment has contributed towards this situation.

15. South Africas GDP outdone by the BRIC countries Source: IMF, RMB FICC Research, August 2011

16. Best performing sectors in SA Construction Finance Transport/Communication Retail Manufacturing Mining Agriculture Breakdown of GDP by sector Index

17. SA global competitiveness Source: World Economic Forum

18. The SA Rand – volatility and competitiveness Following a bout of weakness in 2001 and 2002, the Rand has generally strengthened, and with extreme fluctuations. The Rand has proved to be the most volatile global currency. Government has decided not to consistently intervene in the currency, and generally has favoured a strong currency to strengthen the countrys balance of payments and reduce inflation by attracting short term investment inflows. Economic policy is strongly influenced by the robust and strong banking, services and retail sectors, who are also supported by the financial media. However, unemployment has grown significantly under this policy with the economy underperforming. Jobs have not been created in the two most important sectors, manufacturing and agri industries. While the policy has kept inflation in check, it has dampened economic growth and resulted in a number of sectors underperforming with subdued growth following the 2008/2009 recession. Interest rates have remained relatively high and the SA Reserve Bank has over an extended period applied a very conservative interest rate policy. Interest rates have been stable for the past 12 months. In recent times the Rand has again experienced strong volatility moving from R6.60 - R8.80 – R7.56 over the last 5 months of 2011 / 2012, reflecting a range of a 33% fluctuation. It has currently resumed a strengthening trend which is very concerning for the supply side of the economy. Factors influencing the Rand: – Market risk (high) – Political risk (low) – Carry trade (high) – Capital flows (high) The Rand recovery in the first few months of 2012 has been broad based and the Rand has strengthened in relation to low yielding currencies, and outperformed commodities and EM peers. It has also had a high correlation to equity markets but also to bond markets and commodity prices. The Rand strength situation has stimulated significant debate in the country on how the problem can be addressed. The Reserve Bank has purchased foreign currency at selected intervals, but more recently has stood on the sidelines, and the debate is ongoing.

19. Rate of exchange impact Strength & Volatility: Uncompetitive exports Surge of Imports Forex levels do not reflect the inflation differential

20. Exchange rates Source: I-Net Bridge

21. USD/ZAR and inflation % year-on-year appreciation Source: Inet-Bridge, RMB FICC Research

22. Rand volatility Source: Datastream

23. Volatility against the USD since 2008 Source: Bloomberg, RMB FICC Research

24. SA GDP vs exchange rateNominal effective exchange rate

25. USD vs ZAR, EURO & CNYZAR vs USD, CNY & Euro Note: The Primary Axis reflects values for USD and EUR, while Secondary Axis reflects values for CNY

26. Foreign ownership of local bonds for key emerging markets Source: Stanlib

27. Capital outflows and currency depreciation in emerging markets Percent Change in Nominal Effective Exchange Rate (Jul.-Dec. 2011) Source: World Bank

28. Relative 3 month carry return

29. This years renewal foreign appetite for SA bonds has more than compensated for the outflow from the JSE

30. The Wiggle-Room Index from minimum to maximum space Minimum flexibility - 100 Egypt India Poland Brazil Vietnam Pakistan Turkey Argentina Hungary 82 79 78 70 South Africa Taiwan Venezuela Czech Republic Mexico Colombia Malaysia Thailand Philippines Hong Kong 65 63 60 58 57 55 50 48 Peru Russia Singapore South Korea Chile China Indonesia Saudi Arabia 42 40 30 28 25 23 20 Source: The Economist, 28 January 2012

31. The Rands influence on the agricultural and manufacturing sectors The South African economy faces a low growth scenario and needs future government intervention to stimulate growth. The government has decided to embark on fiscal stimulus rather than loosen monetary policy. The open efficient financial markets facilitate carry trade inflows, which cause the volatility. Very difficult to manage hedging strategies and sign long term contracts. Inflation is not being caused by demand, but by cost push, mainly from administered price increases i.e. electricity has increased by at least 140% over 4 years and a further 16% in April 2012. Thus manufacturers are having their margins squeezed by cost push inflation, and the strong currency that inhibits exports and encourages imports, forcing benchmark pricing down. The situation is exacerbated by imports from South East Asia with countries that provide significant government incentives and managed currencies. The above has resulted in a significant slowdown in the manufacturing and agri industries, with growing unemployment resulting. In addition, in SA 22 people depend on one person employed for at least part of their livelihood. Economic models have proved that the agri industry and the manufacturing sector are the two largest creators of jobs, and thus have the greatest multiplier effect in the economy. There is thus a strong case for a more aggressive monetary policy to improve the competitiveness of the Rand to make both exports and domestic sales more competitive. The weakening would not be inflationary in the immediate short term due to: – Significant spare capacity in manufacturing – Economies of scale will reduce the cost of manufacture – Create employment and through the multiplier effect grow consumption Small business development and incubator companies depend on large business to thrive. Small business feeds on large business, and cannot grow in a low growth scenario. Thus a more competitive exchange rate is essential to boost GDP growth and encourage private sector investment. We are facing a tough world with intense competition and aggressive trade behaviour, which is eroding jobs. There is currently no free market at work due to the distortion mentioned above. A number of countries are using market distortions on a large scale. The current uncertainty in Europe exacerbates the situation and forces additional liquidity and European volumes may be diverted to the SA market. In addition the forecasted recessionary conditions in Europe places extra pressure on developing countries with non competitive currencies.

32. South African deindustrialisation Manufacturing Growth and Contribution to GDP Manufacturing contribution to GDP (%)

33. Countries exposed to the Euro crisis via the trade channel Source: LBCM & IMF

34. 23 The crisis – China comes out tops – GDP per person Q4 2007 – Q2 2011 % change Source: Frontier Advisory

35. Currency stability comparison

36. Case studies from SA industry 1.Glass Container Industry The industry has suffered significantly under the exportation of bulk product for bottling outside of SA. In 2005, 32% of exports left in SA in bulk form, this has increase to a 53% forecast for 2012. This has an effect on the entire Western Cape. The wine industry has calculated that for every 10 million litres of wine shipped in bulk, 107 jobs were lost. Over the last two years Rand strength, when compared to the UK£ contributed at least 20% to the price differnetial. PPI in SA has increased by 9% compared to 3% in the UK. In addition, the number of bottles imported into SA forecasted for 2012 has increased by 26% or 26 million units. This is both in relation to empty and filled glass containers. ProductF11 (000)F12 (000) Cider51 00046 276 Food33 00039 000 Spirits-18 000 Wine12 000 Beer6 34110 200 Soft drinks-3 000 Total imports102 341128 476 Growth26% Imports related to price115 276 90%

37. Case studies from SA industry 2.SA Fruit Canning Industry Close to ZAR 6,0 billion turnover. More than 30 fruit & vegetable factories across SAs rural areas; + 15,000 factory workers. Raw Product sourced from more than 1,800 farms; over 20 000 farm workers. Supports more than 175,000 dependants. >400 000 tons of fruit per annum. >250 000 tons of vegetables per annum. >90% of materials used are from local origin. Main employers in many rural areas in small towns where job opportunities are limited) Labour intensive environment: – Creating Jobs & Employment Opportunities – Uplifting Skills: Higher Skills level required within factories Direct contributor to Beneficiated Agriculture; providing Value-Added Products and Food Security in Agro-Processing Sector. Significant and direct contributor to Rural Development, Community Upliftment and Transformation Objectives.

38. Case studies from SA industry 2.SA Fruit Canning Industry (continued) No room to pass on increases in export markets. SA industry largely price-followers in global markets. Result: Un-competitiveness of SA Industry. Margins have been completely eradicated i.e. drastically reduced export returns. Lead to reduced manufacturing base. Huge financial losses threatening future of the industry. Surge of imports onto local market. Locally manufactured goods cannot compete – threatening local manufacturing and jobs. Result: Decline in consumer demand. Local pineapple industry: Non-resumption of canning operations – largely attributed to economic conditions. Major international company has disinvested in South Africa. SA canners exploring all options to remedy uncompetitive cost structures i.e. Mergers, etc. Reduced fruit intake. Low confidence in farming sector; decreased plantings, tree-pulling, etc. Massive investment of industry under threat i.e. land, infra-structure, etc.

39. Case studies from SA industry 2.SA Fruit Canning Industry (continued) * ROE – Rate of exchange Thus farmers are being squeezed * *

40. Case studies from SA industry 3.Paper Products In 2011 imports increased by 25.1% due to the strong currency from 119 000 toms in 2010 to 149 000 tons in 2011. Thus the strong currency has adversely impacted both volume and pricing in the domestic market, and significantly reduced export competitiveness.

41. Conclusion There is no doubt that the Rand level is directly affecting job creation and FDI in South Africa and therefore growth. It is important that all large economies take note of what damage the current, QE policies are having on emerging countries, and this coupled with unfair trade practices, and certain countries employing currency linking strategies is having a direct influence on the deindustrialisation of South Africa. What are our options (note: SA does not have significant reserves to stabalise or influence the currency) : – Peg the Rand – Lower interest rates to discourage the carry trade and stimulate GDP – Apply taxes to short term investments – Purchase foreign currency, costly due to interest rate differentials – Ensure global economies are cognisance of the damage they are doing to certain emerging states – More protection to nurture SAs industrial / agricultural base, protect jobs and create jobs